2008 podcast williamson when the dragons

When the ‘dragons’ come calling

27 August 2008

The article at a glance

Incorporating high-technology in low-cost products, offering more product choices and turning high-end specialty products into competitively priced mass market items, Chinese companies …

Dragons at your doorIncorporating high-technology in low-cost products, offering more product choices and turning high-end specialty products into competitively priced mass market items, Chinese companies are rewriting the rules of business. So argues Professor Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School, in his book Dragons at Your Door, co-authored with Professor Ming Zeng.

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Professor Williamson has pinpointed the fact that an increasing number of Chinese companies have developed a devastatingly effective competitive edge in the global market, borne out of their experience in China. Here, costs must be ground down but at the same time quality and innovation must be high. Out of this crucible have emerged companies that have mastered the art of cost innovation – the ability to offer both high-value products and services at low cost. Professor Williamson’s book is a warning to managers leading companies in the developed world that the traditional view that they can retreat into the ‘sunlit uplands’ of higher-tech, higher-value niches no longer holds true.

At the time of publication manufacturing companies were in the spotlight: today the threat is spreading to the services industry as well. “In our book, we said that Chinese companies were not as strong at managing businesses such as banking and insurance,” says Professor Williamson.

But now they are charging at these citadels too. One recent example of this took place last November when China’s second largest life assurer, Ping An Insurance bought a 4.2 percent stake in Fortis, a Belgo-Dutch banking and insurance group, for $2.7 billion.

“They are using acquisitions or stakes in Western companies to gain access to knowledge in areas such as risk management, banking services or how to run an insurance company. We are probably going to see an even broader range of industries affected by the rise of China’s dragons,” says Professor Williamson.

The essence of cost innovation is that the dragons sell high quality goods or services at low prices and in so doing can build volume sales. This enables them to reinvest money into R&D to produce the next generation of high-tech products and services. This model is hard to fight against.

The only way to respond to the new threat is to play the ‘dragons’ at their own game, suggest Professors Williamson and Zeng.

Depending on the particular situation, managers can choose from three options: leverage their subsidiary in China to develop low cost, high-tech products; enter into an alliance with a Chinese partner or learn the tricks of cost innovation.

In one example, GE has developed its subsidiary in China, so that it can develop new products for the global market. For example, most of its R&D in CT scanners is now run out of China.

Motorola, once a world leader in mobile phone handsets, has recently spun off this part of its business. One of the reasons was that it failed to produce the same range of innovative products as its rivals such as Nokia. Professor Williamson believes Motorola missed an important trick in not leveraging the knowledge of its experienced Chinese subsidiary.

They were both in a position to use their subsidiary’s knowledge of cost innovation, as practised in China, to build new strategic capabilities for their global business. But only Nokia could see the potential, says Professor Williamson. “Nokia was more aggressive about moving design to China and spotted the opportunity to push for volume at the low-end of the Chinese market. Motorola saw China solely as a market.

“What is interesting about the Motorola case is that they had both been in China for a long time [and could therefore build a strategic capability] but their mentality still said, ‘We see China as a market and therefore not part of our global strategy.’ Nokia went beyond that mentality to say, ‘No, we have to do more than sell in China. We have to use China as a major weapon in our global strategy in order to get design costs down and volumes up. So we can speed up the rate at which we can change products.’”

This year, China has almost thirty companies listed in the Fortune Global 500 from a wide variety of sectors including energy, shipping, banking and insurance and telecommunications. The smallest of these, Lenovo earned annual revenue of $16.8 billion. This alone demonstrates that the Chinese industrial giant has begun its rise, much as the United States did one to two centuries ago.

Beyond these corporate behemoths are many more rising ‘dragons’, companies identified by Professor Williamson, which have cut their teeth in their home market where they have had to navigate through high regulatory controls and government influence, as well as contend with competition from foreign multinationals on their home turf.

The unique power of the ‘dragons’ lies in their ability to build volume and low cost products and services that are also high value and high-tech. Having developed this successful model in China, the ‘dragons’ have flown into other global markets to challenge established businesses from the developed countries. Professor Williamson argues that China’s ‘dragons’ have to be taken seriously. You can join forces with them or copy them. But you cannot ignore them.

Further Reading

Zeng, M. and Williamson P.J. (2007) “Dragons at your door: how Chinese cost innovation is disrupting the rules of global competition”. Boston, MA: Harvard Business School Press.

– Research article produced by Morice Mendoza.